Risk Chase Slows Down: A Good Time to Review Your Portfolios
01/10/2011 0 comments
Making tactical asset allocation decision based on major asset price trends is an effective way to achieve reasonable returns while reducing risk. Recently, risk assets have been on a rage. It began with the year end rally and now, most risk assets are showing fatigue. Last week, except for U.S. equities, most risk assets had negative returns. Markets are trading in a sideway fashion.
No one has a crystal ball to predict future movement. What one can do, however, is to manage portfolios properly. As we enter the new year with elevated markets in most risk assets, it is a good time to review your portfolios.
It is especially important to look at your portfolio allocation mix and adjust the portfolio risk. An overly aggressive portfolio, if not re-balanced back to a risk level investors are comfortable with, can suffer from big loss in a market downturn. With a risk one can not accept, many people sell at the worst time. Some people decide to 'ride it out', taking years and years to recover the loss. On the other hand, a portfolio with overly conservative stance might forgo some gains. With markets getting to a bubble state, some people eventually decide to 'join the party' at the worst time.
It is thus very important to begin your investment process with proper risk assessment and periodically review and manage your portfolios. Given the current market conditions, it is a good time to review your strategies and portfolios.
In the following table, one can clearly see that all risk assets have their trend scores reduced last week. The 'riskiest' assets like frontier market stocks (FRN) and commodities had over 1.5% negative returns. Beaten down 'safe' assets like municipal bonds (MUB) and investment grade bonds (CFT, CIU) recovered a bit. Though this is still a short term phenomenon and we don't know if this is the beginning of a trend change, it serves to remind those who need a portfolio checkup. Refer here for more asset class performance info.
| Assets Class | Symbols | 01/07 Trend Score | 12/31 Trend Score | Direction |
|---|---|---|---|---|
| US Stocks | VTI | 10.18% | 11.81% | v |
| Frontier Market Stks | FRN | 9.72% | 14.92% | v |
| US Equity REITs | VNQ | 9.17% | 11.39% | v |
| International REITs | RWX | 8.44% | 13.06% | v |
| Emerging Market Stks | VWO | 8.03% | 11.92% | v |
| Commodities | DBC | 7.98% | 12.4% | v |
| Gold | GLD | 5.84% | 11.49% | v |
| US High Yield Bonds | JNK | 4.08% | 4.6% | v |
| International Developed Stks | EFA | 2.76% | 7.24% | v |
| Emerging Mkt Bonds | PCY | 1.44% | 1.6% | v |
| US Credit Bonds | CFT | 1.17% | 1.14% | ^ |
| Intermediate Treasuries | IEF | 0.43% | 0.19% | ^ |
| Treasury Bills | SHV | 0.03% | 0.05% | v |
| Total US Bonds | BND | -0.07% | -0.07% | v |
| Mortgage Back Bonds | MBB | -0.89% | -0.66% | v |
| International Treasury Bonds | BWX | -0.96% | 2.93% | v |
| Municipal Bonds | MUB | -2.38% | -2.8% | ^ |
labels:investment,
Symbols:EEM,VNQ,FRN,VWO,IYR,ICF,GLD,RWX,VTI,SPY,IWM,PCY,EMB,JNK,HYG,PHB,EFA,VEU,IEF,TLT,GSG,DBC,DBA,CFT,BWX,MBB,BND,MUB,SHV,AGG,
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